(PUB) Vanguard Advisor

PERFORMANCE TheGap in Investor Returns

This difference between the inves- tor’s realized return and the fund’s stated return (-1.5%versus 7.3%, inour example) is often called the “behavior gap.”As investors, our behavior has an impact on the returns we realize. Are we buying at tops and selling at bot- toms, or arewe staying the course? While the example above illustrates a situation where the investor’s return was less than the fund’s return, it is pos- sible for an investor’s return tobehigher than the fund’s return. Had our investor started with a $50,000 investment and

During the first six months, the investor made $1,000 (a 10.0% gain on the initial $10,000 investment). At the start of the second half of the year, the investor had $61,000 invested in the fund—the $10,000 initial invest- ment, the $1,000 gain and the $50,000 addition. Over the next sixmonths, the fund lost 2.5%, or $1,525, leaving him with $59,475. Though the traditional sources would report the fund gained 7.3% on the year, our investor actually lost money ($525) due to the timing of his trades. Invest. Return Diff. EmergingMarkets Index 16.3% 6.2% -10.1% REIT Index 29.4% 22.2% -7.2% Capital Value 33.0% 27.4% -5.7% World ex-U.S. Index 17.6% 12.1% -5.5% Total International Stock 17.3% 12.0% -5.3% HighDividendYield Idx. 23.4% 19.0% -4.4% TotalWorldStock Index 19.9% 15.6% -4.4% International Explorer 22.2% 18.7% -3.6% Target Retirement 2050 20.2% 16.7% -3.5% MidCapGrowth Index 26.1% 22.6% -3.5% DividendApprec. Idx. 20.2% 16.8% -3.5% Target Retirement 2040 20.2% 16.8% -3.4% Target Retirement 2030 18.9% 15.4% -3.4% SmallCapGrowth Index 29.9% 26.9% -2.9% Target Retirement 2020 16.4% 13.6% -2.8% Target Retirement 2045 20.2% 17.8% -2.5% Target Retirement 2035 19.9% 17.6% -2.3% Target Retirement Income 10.3% 8.1% -2.2% MidCapValue Index 27.9% 25.7% -2.1% Target Retirement 2025 17.6% 15.6% -2.0% DevelopedMarkets Idx. 17.9% 15.9% -2.0% SmallCap Index 29.0% 27.1% -1.9% DividendGrowth 20.4% 18.7% -1.7% Target Retirement 2010 13.4% 11.7% -1.7% Strategic SmallCap Equ. 28.6% 27.0% -1.6% Target Retirement 2015 15.1% 13.6% -1.5% MidCapGrowth 25.3% 24.0% -1.3% SmallCapValue Index 28.0% 26.7% -1.3% Wellesley Income 13.7% 12.4% -1.3% Managed Payout 16.1% 15.0% -1.2% MidCap Index 27.1% 25.9% -1.1% ExtendedMarket Index 28.2% 27.2% -1.0% Equity Income 23.3% 22.3% -0.9% PRIMECAPCore 23.9% 22.9% -0.9% Total StockMarket 23.8% 23.0% -0.9% Balanced Index 16.3% 15.7% -0.6% SelectedValue 26.2% 25.6% -0.6% Five-YearTurnaround Mkt. Return

IT’S NO SURPRISE that stocks and stock funds have generated strong returns over the past five years. Just take a look at the Performance Review inside this letter. The question is: Howmuch of that return did Vanguard investors actually capture? Returns reported by mutual fund companies and other services like Morningstar are point-in-time returns. They assume that you made a single investment at the start of a given time period and simply reinvested distribu- tions. This is a fair way to measure a manager and fund’s performance—this ishow I report performance toyou in the PerformanceReview onpages 8 through 11—but we know that, for better or worse, investors are buying and selling funds all the time. You may be adding money on a monthly basis, and your neighbor may be taking out chunks to pay for her retirement. Then, of course, there are those who either try to time the market, or feel compelled to move money around to try and capture some mythical extra gain. As a result, point- in-time returns don’t necessarily reflect what investors actually earn. Let’s walk through an example. Say an investor puts $10,000 in a fund at the start of the year. The fund returns 10.0% over the first six months of the year. The investor, pleased with the performance, decides to add$50,000 to the fund. Unfortunately, over the next six months the fund loses 2.5%. Up 10.0% and then down 2.5%works out to a total return for the year of 7.3%. However, once we account for our investor’s cash flows, we discover that hispersonal rateof return (calculatedas an internal rateof return)was actually a loss of 1.5%. How is that possible? In simple terms, our luckless inves- tor had a lot more money invested in the fundwhen itwas on a losing streak, so those negative returns countedmore heavily inhis personal, dollar-weighted rate of return.

Mkt. Return

Invest. Return Diff.

Value Index STAR Income

22.5% 21.9% -0.5% 8.6% 8.1% -0.5% 20.3% 19.8% -0.5% 23.0% 22.7% -0.4% 23.7% 23.4% -0.4% 12.1% 11.7% -0.3% 17.6% 17.3% -0.3% 16.2% 15.9% -0.3% 16.8% 16.6% -0.2% 25.5% 25.3% -0.2% 22.9% 22.7% -0.1%

International Growth

LargeCap Index Growth Index STARCons. Gro.

ConvertibleSecurities

Energy

Wellington Social Index 500 Index

International Value 17.4% 17.4% -0.0% Admiral T-MBalanced 13.8% 13.8% -0.0% Capital Opportunity 25.6% 25.6% -0.0% STAR 16.8% 16.8% 0.1% PreciousMetals&Mining 6.4% 6.5% 0.2% HealthCare 25.1% 25.3% 0.2% PRIMECAP 24.1% 24.5% 0.4% MorganGrowth 23.3% 23.7% 0.4% Admiral T-MSmallCap 27.9% 28.3% 0.4% Admiral T-MCap. App. 23.6% 24.1% 0.5% STARGrowth 18.8% 19.3% 0.6% STARMod. Growth 15.5% 16.2% 0.7% Diversified Equity 24.4% 25.2% 0.8% Admiral T-MGro. & Inc. 22.9% 23.8% 0.9% Windsor II 22.6% 23.6% 1.0% Explorer 27.5% 28.7% 1.2% Market Neutral 1.2% 2.4% 1.2% U.S. Growth 23.0% 24.3% 1.3% U.S. Value 23.1% 24.4% 1.4% Windsor 25.1% 26.8% 1.7% Growth& Income 22.5% 24.6% 2.1% Global Equity 22.3% 24.8% 2.5% Strategic Equity 28.5% 32.5% 4.0% Pacific Index 14.8% 22.5% 7.7% European Index 19.7% 28.5% 8.8%

Note:All returnsare five-year annualized returns from theendof February2009 throughFebruary2014.Market returnsare returnsof the investor shareclass. Investor returnswerecalculatedusingall shareclassesandmonthly fund flows. Entries in theDiff. columnmayappear off by0.1%due to rounding.

4 • Fund Family Shareholder Association

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